Op-Ed Columnist
âReagan Did Itâ
By PAUL KRUGMAN
Published: May 31, 2009
The New York Times

âThis bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.â So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.

He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislationâs significance. And as for that jackpot â well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn â the turn that made crisis inevitable â took place in the early 1980s, during the Reagan years.

Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence.

On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us.

The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in Americaâs financial rules was Reaganâs biggest legacy. And itâs the gift that keeps on taking.

The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry â whose deposits were federally insured â a license to gamble with taxpayersâ money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money.

But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending â restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded.

Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

We werenât always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent.

All this, we were assured, was a good thing: sure, Americans were piling up debt, and they werenât putting aside any of their income, but their finances looked fine once you took into account the rising values of their houses and their stock portfolios. Oops.

Now, the proximate causes of todayâs economic crisis lie in events that took place long after Reagan left office â in the global savings glut created by surpluses in China and elsewhere, and in the giant housing bubble that savings glut helped inflate.

But it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable.

Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise.

These defaults in turn wreaked havoc with a financial system that â also mainly thanks to Reagan-era deregulation â took on too much risk with too little capital.

Thereâs plenty of blame to go around these days. But the prime villains behind the mess weâre in were Reagan and his circle of advisers â men who forgot the lessons of Americaâs last great financial crisis, and condemned the rest of us to repeat it.

A version of this article appeared in print on June 1, 2009, on page A21 of the New York edition.

The Garn-St. Germain Depository Institutions Act of 1982 (Pub.L. 97-320, H.R. 6267, enacted 1982-10-15) is an Act of Congress, that deregulated the Savings and Loan industry. This Act turned out to be one of many contributing factors that led to the Savings and Loan crisis of the late 1980s.[1]

The bill, whose full title was "An Act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans," was a Reagan Administration initiative.[2]

The bill is named after its sponsors, Congressman Fernand St. Germain, Democrat of Rhode Island, and Senator Jake Garn, Republican of Utah. The bill had broad support in Congress, with co-sponsors including Charles Schumer and Steny Hoyer.[3] The bill passed overwhelmingly, by a margin of 272-91 in the House.[4]

Krugman is becoming a comedy act. He never had any intellectual honesty. Even for him however, this is a new low.

For the record, the S&L industry had been the prime source of mortgage funding for generations. Their business model had a fundamental flaw however. They were the classic borrow short term, lend long term investors. Their funding came from demand deposits, and they were limited by government regulation as to the rates they could pay. Their assets were typically all 30 year loans. This worked fine until two things happened. One, inflation got going in the late '60's and in earnest in the '70's. Two, the money market mutual fund industry was born. Suddenly getting 2 % or whatever the government-mandated S&L savings rate was didn't seem very attractive. Savers flocked to MM funds, putting the S&L industry at risk. As I recall, this legislation was designed to allow them to offer competitive , market-based rates.

Of course, the S&L's still had the mismatch problem and were stuck holding a ton of 4% mortgages when rates when ballistic. Congress in its wisdom greatly increased the FDIC deposit guarantee limit, which was the real source of the S& L crisis that unfolded later. The '87 Tax Reform act that basically destroyed the property market also contributed.

Krugman's "analysis" is a joke, even for a worm like him. I am confident Reagan would have done things quite differently if he did not have to fight a leftwing democrat congress on every issue. They used to mock him that his budgets would be DOA when delivered to congress. Democrats and their media allies savaged Reagan for not spending lavishly enough on social programs. In that pre-Gingrich era, he had little support from congressional republicans. Reagan did spend heavily on the military. He had to to make up for the Carter years. All in all, I'd call it money well spent, since he won the Cold War and destroyed the Soviet Union in the process.

The people who passed the increase in deposit insurance in the middle of night was the Carter administration in March of 1980 when they increased the deposit insurance from $ 40,000 to $ 100,000 limit.

This increase in deposit limit was at the root of the problem that later on created the foundations that resulted in the late 1980âs Savings and Loan Scandal.

This thread is about the impact that an increase in deposit insurance has in the US economy - the unintended consequences as well.

The point is: if the deposit insurance had not been increased in March 1980 we may have avoided the savings and loans debacle of the late 1980's.

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March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded.

Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate.